Abstract

We examine the issue of variable selection in linear regression modeling,
where we have a potentially large amount of possible covariates and
economic theory offers insufficient guidance on how to select the
appropriate subset. In this context, Bayesian Model Averaging presents a
formal Bayesian solution to dealing with model uncertainty. Our main
interest here is the effect of the prior on the results, such as posterior
inclusion probabilities of regressors and predictive performance. We
combine a Binomial-Beta prior on model size with a g-prior on the
coefficients of each model. In addition, we assign a hyperprior to g, as
the choice of g has been found to have a large impact on the results. For
the prior on g, we examine the Zellner-Siow prior and a class of Beta
shrinkage priors, which covers most choices in the recent literature. We
propose a benchmark Beta prior, inspired by earlier findings with fixed g,
and show it leads to consistent model selection. The effect of this prior
structure on penalties for complexity and lack of fit is described in some
detail. Inference is conducted through a Markov chain Monte Carlo sampler
over model space and g. We examine the performance of the various priors
in the context of simulated and real data. For the latter, we consider two
important applications in economics, namely cross-country growth regression
and returns to schooling. Recommendations to applied users are provided.

Item Type:

MPRA Paper

Original Title:

Mixtures of g-priors for Bayesian model averaging with economic applications

Feldkircher, M. and S. Zeugner (2012) The Impact of Data Revisions on the
Robustness of Growth Determinants: A Note on `Determinants of Economic
Growth. Will Data Tell'?, Journal of Applied Econometrics, forthcoming.